Futures at 500

When Futures magazine (then called Commodities magazine) was first launched in 1972, my recollection (as chief outside counsel to the Chicago Board of Trade at the time) is that the world's most active futures contract was on soybeans. Trading still occurred in vast trading rooms populated by hundreds of jacketed floor brokers and floor traders and the cloak room was a place for camaraderie before the daily competition began.

With the possible exception of froex futures, there were no "financial futures contracts." The federal regulator was a small unit within the U.S. Department of Agriculture called the Commodity Exchange Authority. The federal law defined "commodity" as a long list of domestic farm products.

The Commodity Futures Trading Commission (CFCT) would not be operational for another three years. The population of registered futures commission merchants was about 400, several times today's ranks. Maybe the exchanges had one or two "public" directors on their governing boards; the rest were members.

It would be 2-1/2 years before the CFTC was created by Congress, a process in which I was deeply involved, especially in ensuring that the new agency would be the sole regulator of the U.S. futures markets and expanding the definition of "commodity" to include not only agriculture but also all goods and articles as well as services, rights and interests, a vast remit.

Financial futures, now a key component of futures trading worldwide, would not ascend until later when Dr. Richard Sandor, the CBOT's chief economist, designed the first-ever interest rate futures contract amidst much angst at the Treasury Department, the Comptroller of the Currency and other federal financial regulators that required many meetings that I attended to assuage their concerns. Meanwhile, because those products involved debt securities, the Securities and Exchange Commission (SEC) sought (unsuccessfully) to intervene on jurisdictional grounds only to be stymied by the CFTC's statutory "exclusive jurisdiction" over all U.S. futures activity.

When I was chairman of the CFTC (1981-83), the SEC re-appeared as several exchanges sought CFTC permission to list futures contracts on major ("broad-based") stock indexes including the S&P 500 and the Dow Jones Industrial Averages. The resulting agreement (known as the "Shad-Johnson Accord") was enacted into law by the Congress, assigning full regulatory authority to the CFTC over those products. The Accord also solved a vexing legal issue affecting all futures contracts, namely, whether such contracts could legally require cash settlement (that is, bar physical delivery of the underlying asset) when the statute contained dozens of references to "future delivery." The Accord, by prohibiting physical delivery of the stocks comprising the indexes while still categorizing the instruments as legitimate futures contracts, opened the door for the many cash-settled products that exist today.

Much has changed since those days in the futures world. Trading is now almost entirely electronic. The exchanges have morphed into publicly-listed companies. The CFTC's responsibilities have expanded to include most transactions in swap agreements. The SEC now co-regulates trading in the nascent single-stock and narrow-based stock index futures market. Occasional challenges by other regulators to the CFTC's exclusive jurisdiction continue, unsuccessfully. And automated trading has given rise to new phrases such as "high frequency trading" and "co-location." Of course, trading volumes and the types of futures contracts available have also soared.

Note: August will be the 500th issue of Futures magazine dating back to its origin as Commodities magazine in February 1972. In addition to the print issue that will include several look backs to the important articles that defined Commodities and Futures, we will be digitizing many of those articles and including additional features highlighting the important people, strategies and stories over 500 issues. Here Commodities' and Futures' good friend Philip McBride Johnson discusses the early days. Look for additional 500th issue related features soon to come.